Mortgage relief options — refinance or loan modification?

Mortgage relief options — refinance or loan modification?

Mortgage relief options — refinance or loan modification?

If you are one of the millions of Americans facing financial difficulties due to the coronavirus pandemic, you may be looking for ways to save money on your mortgage.

Many people are struggling with job loss or reduced hours at work, making their once-affordable mortgage payments, less affordable.

Fortunately, the Federal Reserve considered the potential ramifications of COVID-19 and took preemptive steps to help encourage consumer spending.

Near record-low interest rates could make a home refinance or loan modification a beneficial option for some homeowners. If you are struggling to pay your mortgage, you may want to consider one of these options:

Home refinance vs. loan modification

Homeowners have two significant options that don’t involve taking out additional debt to help assist with the cost of their loan.

Home refinance

Refinancing your home, replaces your old mortgage with a new one.

A refinance allows you to change the terms of your loan, extending your loan terms, shortening your repayment terms, reducing your interest rate or changing the type of loan you have.

 If you don't know where to start with sizing up mortgage rates, using a tool Credible can make it easier. Credible finds the best refinance rates for you so you can choose the refinance loan that fits your needs.


Pro: You could save money on the total cost of your loan. Refinancing at a lower rate could potentially save you thousands of dollars.

When you refinance your home loan for a lower interest rate, you’ll save on the total cost of interest paid over the life of your loan.

For example, if you owe $200,000 on your mortgage for another 20 years at 4.5 percent interest rate, you will pay about $103,670 in interest. However, if you can refinance your loan to a 3 percent interest rate, you will pay $66,206 in interest. That’s a savings of $37,464.

Find your rate now by inserting some information into Credible's free online tool.


Con: A refinance isn’t free.

For most borrowers, the biggest drawback to a refinance is paying for the refinance. Since a refinance means a new loan, you’ll ly have to pay many of the same fees you did when you purchased your home, including an application fee, loan origination fee, and title insurance. You may even cover the cost of an updated appraisal.

Expect to pay between two and six percent of the total amount borrowed.

When it might make sense for you:

Refinancing your home may make sense for you if you can recover the cost of your refinance within a few years.

Ideally, only consider a refinance if your interest rate will drop a full percentage point or more to ensure your savings outweigh the cost of your loan refinance within five years.

If you are considering a loan refinance, you can compare several options on Credible to get the best terms.

Loan modification

Loan modification allows you to change the conditions of your original loan. Your original lender must agree to the new terms. A loan modification could change your loan repayment terms, reduce your interest rate, change the structure of your loan, or reduce the amount of money you owe.

Pro: You can get significantly better terms on your current loan.

A loan modification allows the borrower to reduce their interest rate, convert to a fixed-rate loan, increase the repayment period, and/or reduce the balance owed on the home.

Since you won’t be getting a new loan, you don’t have to worry about closing costs or loan origination fees. If you are at risk of losing your home, a loan modification could allow you to keep the property.

Keep in mind that a loan modification will not stop foreclosure proceedings.

Con: A lender will ly only grant a loan modification under extreme circumstances.

Lenders will ly only consider applicants who are at a high risk of facing foreclosure. Typically, a loan modification helps both the lender and the borrower avoid the expense and hassle of foreclosure. While a loan modification is usually free, it’s time-consuming, and a lender could foreclose on a property before they decide about the loan modification.


Note: The CARES Act provides some guidance on loosening modification qualifications. Your financial hardship must be related to COVID-19, and loans may not be more than 30 days past due to qualify for the CARES Act loan modification.

When it might make sense for you: 

A loan modification might make sense for you if you are having trouble paying your mortgage, and you want to avoid a foreclosure. Additionally, if you owe more on your home than it’s worth, a loan modification could save you money.

Many people are facing financial difficulties right now. If you are concerned about losing your home or you’d to take advantage of lower interest rates, now is the time to look into your options.


6 Mortgage Modification Options: What You Need To Know To Stay In Your Home

Mortgage relief options — refinance or loan modification?

Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.

A home loan or mortgage modification is a relief plan for homeowners who are having difficulty affording their mortgage payments. Borrowers who qualify for loan modifications often have missed monthly mortgage payments or are at risk of missing a payment.

Here’s what you need to know to get a mortgage loan modification and stay in your home.

What Is a Mortgage Modification?

Modifying your mortgage can help you avoid foreclosure by—either temporarily or permanently—adjusting the length of your loan, switching from an adjustable-rate to a fixed-rate mortgage, lowering the interest rate or all of the above. Un mortgage refinancing, loan modifications don’t replace your existing mortgage with a new one. Instead, they change the original loan.

Borrowers with Fannie Mae- or Freddie Mac-owned mortgages might be eligible for a Flex Modification, which allows lenders to reduce the interest rate or extend the length of your loan (which shrinks the monthly payment amount but doesn’t change the amount owed  ).

For homeowners facing hardship due to the coronavirus pandemic, a loan modification can help you reduce your monthly payments so that they fit your current budget. Those who are already in mortgage forbearance can request a modification after the forbearance expires if they still need mortgage assistance.

Under the CARES Act, borrowers with federally-backed loans are entitled to up to one year of forbearance. Although most home loans are eligible for this type of forbearance, approximately 14.5 million home loans are not covered because they are privately owned.

However, not all lenders offer loan modifications, even those home loans covered under forbearance provisions in the CARES Act. So be sure to contact your lender to come up with a doable plan (whether it’s a forbearance, modification or something else) that will prevent you from defaulting on your loan.

Who Qualifies for a Loan Modification?

Borrowers facing financial hardship—for any number of reasons—might qualify for a loan modification; however, eligibility requirements are different for each lender.

Some lenders require a minimum of one late or missed mortgage payment or imminent risk of missing a payment in order to qualify. Lenders also will want to assess what caused the hardship and whether a modification is a viable path to affordability.

In other words, if you lose your job and no longer have any income, a modification might not be enough to get you back on track. However, if you start earning less (due to a job change or other factors), you might still be able to make regular payments, but only if you can reduce the monthly cost.

There are several reasons why people might no longer be able to afford their current mortgage payments, which might qualify them for a modification. Lenders will ly ask for proof of hardship. These reasons include:

  • Loss of income (due to a drop in wages or death of a family member)
  • Divorce or separation
  • An increase in housing costs
  • Natural disaster
  • Health pandemic
  • Illness or disability

If you’re suffering from financial hardship, be sure to talk to your lender right away. Find out whether you qualify for a loan modification, per their rules, and if that solution makes sense for you.

How to Modify Your Home Loan

There are several ways your mortgage lender can modify your home loan, from reducing your interest rate to making your mortgage longer in order to lower your monthly payments.

Reduce the Interest Rate

Shaving your interest rate can reduce your monthly mortgage payments by hundreds of dollars. A $200,000 mortgage payment with an interest rate of 4% on a 30-year fixed-rate loan is about $955 per month, compared to the same loan with an interest rate of 3%, which comes out to $843 per month.

This is similar to refinancing your loan, but the difference is that you don’t have to pay closing costs or fees.

Lengthen the Term

Extending the length of your loan is another strategy lenders use to make the monthly payments more affordable. For example, if you have a $100,000 mortgage at an interest rate of 4% with 15 years left, you would pay $740 per month. If you extend that loan by 10 years, you end up paying $528 per month. Keep in mind, you’ll pay more interest over the life of the loan if you extend it.

Switch from an Adjustable-Rate-Mortgage to a Fixed-Rate Mortgage

Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage might not lower your existing payments, but it could help protect you from rising interest rates down the road.

Since ARMs are set up to have floating rates, they change with the market. For example, if your interest rate is 3.5% and the average rate rises to 4%, so will your rate. This can be a bad scenario if you’re in a rising-rate environment. By locking in your interest rate, you’re guaranteed to pay the same interest rate over the life of your loan, regardless of what the market does.

Roll Late Fees Into the Principal

If you have accrued past-due charges on things interest, late fees or escrow, some lenders will add that to your principal balance and reamortize the loan. That means the amount you owe will be spread out over time with the new balance. If you extend the length of your loan, you might end up paying less in monthly payments even though you owe more toward your principal.

Reduce the Principal Balance

In rare circumstances, lenders will actually lower the amount you owe, also known as a principal modification. These were more common during the housing crisis when loose lending standards prevailed and home values tanked, leaving many borrowers underwater with their mortgage.

Whether a lender decides to reduce the principal ly depends on the current local housing market, how much you owe and what their loss would be if they went this route versus a foreclosure.

All or Some of the Above

Some borrowers might need a combination of actions in order to make the monthly mortgage bill manageable. Depending on your need, a lender might reduce the interest rate and extend your loan so that your monthly mortgage payment is reduced in two ways, without touching the principal balance.

The lender ly will go through a cost-benefit analysis when assessing the type of modification that makes sense for both parties.

How Can I Apply for a Loan Modification?

Homeowners who are facing financial hardship that makes it impossible to fulfill the mortgage contract should get in touch with their lender or servicer immediately, as they might be eligible for a loan modification.

Typically, lenders will ask you to complete a loss mitigation form. Because foreclosures are so costly for investors, a loss mitigation form helps them look at alternatives, such as loan modifications, to figure out what makes the most financial sense.

Be prepared to submit a hardship statement; mortgage and property information; recent bank statements and tax returns; profit and loss statements (for those who are self-employed) and a financial worksheet that demonstrates how much you’re earning versus spending.

If your loan modification application is denied, usually, you have the right to appeal it. Because rules vary by lender, find out when the appeal deadline is. Next, you’ll want to get precise information on why your loan was denied, as this will help you prepare a better case in your appeals.

There are many reasons why you might not qualify, from not providing sufficient proof of hardship to having a high debt-to-income ratio (DTI). A high DTI means that you have a lot of debt relative to your income, which might signal that you can’t afford your mortgage, even at a modified amount.

Working with a housing counselor or attorney who specializes in mortgage modifications can improve your chances of getting approved for a loan modification.

Will Modifying My Mortgage Hurt My Credit?

If the modification is federally backed (i.e. owned by Freddie Mac, Fannie Mae, VA, FHA or USDA) and is a result of the coronavirus, then it will not be reported to the credit bureaus per the CARES Act.

Otherwise, some loan modifications might be reported as settlements or judgments, which could result in a ding to your credit. Be sure to talk to your lender about if their policy is to report modifications. However, a loan modification is not as damaging as a foreclosure.


COVID-19 Mortgage Relief for Homeowners Facing a Payment Crisis

Mortgage relief options — refinance or loan modification?

The coronavirus pandemic has left many Americans dealing with reduced income or unemployment. The federal agencies and government-sponsored enterprises, or GSEs, that buy and insure mortgages have stepped in to provide mortgage relief options to affected homeowners.

Some lenders and state governments have also taken independent action to provide mortgage relief to homeowners.

If you’re worried about paying your mortgage, the mortgage relief programs below may be able to help.

To start, verify your mortgage type

The kind of mortgage you have may determine what type of assistance is available to you.

You can find out if your conventional mortgage is owned by Freddie Mac or Fannie Mae using the loan look-up tools on their websites.

To verify whether you have an FHA, VA or USDA loan, find your closing documents (either hard copies or electronic versions) and look for the Closing Disclosure. In the upper right of the first page of this document, under “Loan Information,” you'll see checkboxes indicating your loan type: conventional, FHA, VA or other.

If you can't locate this document, try looking at your monthly mortgage statement or contacting your lender at the phone number listed on the statement.

Regardless of mortgage type, contact your lender to discuss relief options. The federal government has encouraged all lenders to support homeowners who need mortgage assistance due to hardship brought about by the coronavirus pandemic.

» MORE: What do Fannie Mae and Freddie Mac do?

How mortgage forbearance has changed due to COVID-19

Forbearance lets you make a reduced payment or no payment for a set amount of time. Interest accrues, and the skipped amount needs to be paid after the forbearance period ends. Before you start forbearance, make sure your lender offers repayment terms that seem reasonable.

Under normal circumstances, forbearance typically lasts about three months, but longer periods are available to homeowners dealing with financial issues during this time. Repayment may be expected as a lump sum at the end of forbearance, sometimes called a “balloon payment.” If a lump-sum payment isn’t feasible, try to negotiate for another option.

Fannie Mae, Freddie Mac, along with the FHA, VA and USDA, have required lenders to offer options other than lump-sum repayment to borrowers using COVID-19 forbearance. The agencies and GSEs have also barred lenders from charging additional fees, penalties or interest during forbearance beyond what would have normally accrued.

Lenders shouldn't report forbearance to the credit bureaus.

“The lender should report it as 'paying as agreed,'” says Rocke Andrews, current president of the National Association of Mortgage Brokers. Once the forbearance is repaid, Andrews says, “in theory, it shouldn't affect your ability to refinance or purchase in the future.”

Nerdy tip: If you were already behind on payments when you asked for forbearance, that delinquency may show up on your credit report and last until you are current with payments. This is one reason it's better to request mortgage assistance before you have missed a payment.

Freddie Mac forbearance

Freddie Mac borrowers are eligible for up to 12 months of forbearance, which won't be reported to the credit bureaus. If you are already in an active forbearance as of Feb. 28, 2021, you may request an additional three months of forbearance (up to 15 months total).

If, at the end of the forbearance term, you’re able to go back to your regular mortgage payments but are unable to pay anything additional, you may be eligible for COVID-19 Payment Deferral. With that deferral, the amount of the forbearance wouldn't accrue interest and would not be due until the end of the mortgage — whether that’s when you sell, refinance or pay off the loan.

Even if you are ineligible for deferral, your lender cannot demand a lump sum repayment and is required to work with you to find a different solution.

Foreclosures and evictions are currently suspended through March 31, 2021. That means no new foreclosure proceedings will start, and existing ones are on hold. You can find more info on the Freddie Mac website.

Fannie Mae forbearance

Borrowers are eligible for up to 12 months of reduced or suspended mortgage payments. The forbearance won't be reported to the credit bureaus. Fannie Mae borrowers already in forbearance as of Feb. 28, 2021, may request an additional three months of forbearance for a total of 15 months' delayed payments.

Fannie Mae borrowers may also be eligible for a COVID-19 Payment Deferral, which allows the amount of the forbearance to be paid at the end of the mortgage rather than at the end of the forbearance period. No matter what, your lender cannot require you to make a lump-sum repayment.

Fannie Mae has also suspended foreclosures and evictions through March 31, 2021. Learn more on Fannie Mae's website.

FHA forbearance

The FHA has set a deadline of June 30, 2021, to apply for initial COVID-19 forbearance. You can request an initial six months of forbearance and an additional six months if needed.

If you are already in active forbearance that began on or before June 30, 2020, after 12 months you can request up to two additional three-month extensions, for a total of 18 months of forbearance.

In addition to COVID-19 Forbearance, the FHA always has several mortgage relief programs in place. This includes standard mortgage forbearance lasting up to six months and special forbearance for unemployment, which can last a year or more.

At the end of your FHA forbearance term, you may be eligible for HUD's COVID-19 Standalone Partial Claim.

This is a no-fee, no-interest junior lien (a type of second mortgage) that doesn't have to be paid back until you sell your home, pay off your mortgage or otherwise end the loan.

The FHA says it offers other repayment options for homeowners who are ineligible for the Standalone Partial Claim. FHA lenders cannot require a lump-sum repayment.

VA loan forbearance

The Department of Veterans of Affairs has extended the deadline to apply for an initial COVID-19 forbearance to June 30, 2021.

VA borrowers are eligible for a six-month forbearance, which can be extended another six months. If you requested an original forbearance on or before June 30, 2020, you can apply for two additional three-month extensions if needed. Each extension needs to be requested separately.

The Department of Veterans Affairs has stopped all evictions and foreclosures through June 30, 2021. See mortgage assistance information on the VA website.

USDA forbearance

The USDA has set a deadline of June 30, 2021, to apply for initial assistance if your mortgage is backed by the USDA Rural Housing Service.

If your ability to pay your loan has been affected by the coronavirus, you can receive 180 days’ forbearance as long as you file by that date. Assistance can be extended another 180 days if needed. As with FHA and VA loans, if you were in active forbearance on or before June 30, 2020, and need additional deferral, you can apply for two additional three-month forbearance periods.

Foreclosures and evictions on USDA guaranteed loans are suspended through June 30, 2021. Find more information on the USDA website.

» MORE: What to do if you can't pay your mortgage

Get answers to questions about your mortgage, travel, finances — and maintaining your peace of mind.

Freddie Mac and Fannie Mae have allowed lenders to offer loan modifications typically reserved for homeowners who are victims of natural disasters. Contact your lender to understand your loan modification options.

Depending on your employment outlook, a Flex Modification, which is offered by both GSEs, may be another option.

 If your mortgage is backed by Freddie Mac or Fannie Mae, the COVID-19 Payment Deferral option described above may be less onerous than a loan modification.

If you have an FHA loan or a VA loan, talk to your lender about loan modification options. Both agencies offer this type of mortgage assistance, but to date, neither has altered its usual programs to specifically assist homeowners impacted by the coronavirus pandemic.

» MORE: Understanding mortgage loan modifications

What if you don't have a government-backed mortgage?

Not all mortgages are backed by government agencies or the GSEs. Sometimes called “portfolio loans,” these mortgages aren't resold and are kept in-house by the lender.

Portfolio loans — which can include mortgages for self-employed borrowers, borrowers who are not U.S. citizens or borrowers who have experienced a foreclosure — don't meet Freddie Mac and Fannie Mae's standards.

Lenders may also choose to hang onto a mortgage for other reasons.

Portfolio loans aren't covered by any of the mortgage relief programs listed above. However, your lender may have its own assistance programs. Follow the steps below to contact your lender.

» MORE: Mortgage lenders' responses to coronavirus

Contact your lender to get mortgage relief

No matter what type of loan you have or what government assistance may be available, contact your lender directly if you have concerns about paying your mortgage.

You don't have to wait until you are delinquent on your mortgage, and calling before you miss a payment will ly give you more mortgage relief options. If you've already missed a payment when you ask for forbearance, Andrews says, that delinquency will show up on your credit report (and will stay there until the loan is made current again).

Here's what you should have ready when you contact your lender:

  • An estimate of your current income (and future income, if you anticipate that it may change).
  • An estimate of your current monthly expenses.
  • Your most recent mortgage statement.
  • Documentation of what caused your situation to change.

Beware of third parties offering mortgage assistance. Look for help from your lender, not from other organizations offering mortgage relief. If you want to get advice about talking to your lender, find a HUD-approved financial counselor on the HUD website. These counselors offer no-cost assistance and can help you be better prepared to call your lender.


Loan Modification vs. Refinance: How to Decide

Mortgage relief options — refinance or loan modification?

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

The 2019 Survey of Consumer Finances found that about 30% of homeowners have less than $14,000 in assets to cover an unexpected drop in income.

If the pandemic and its economic fallout have decimated your emergency fund, reducing your housing expenses may be more necessary now than ever.

Loan modifications and refinancing are two ways for homeowners to lower their monthly mortgage payments.

Learn how a loan modification and refinance differ, and find out which option is best for your situation:

What is a loan modification?

A loan modification changes the terms of your mortgage to make the monthly payments more affordable. It’s a strategy for avoiding foreclosure if you’re experiencing a financial hardship that’s preventing you from paying your mortgage.

If you’re interested in a home loan modification, you’ll need to talk to your loan servicer. That’s the company you send your mortgage payments to, and they’re the only ones who can modify your loan.

If you’re eligible for a loan modification, your loan servicer may agree to one or more of these changes:

  • Interest rate decrease
  • Loan term extension
  • Loan type change
  • Principal reduction

You’ll need to provide your servicer with evidence of your change in financial circumstances to help them decide whether and how to modify your loan.

What is a mortgage refinance?

A mortgage refinance replaces your current home loan with a new one, and you don’t have to refinance with your current lender: you can shop around.

Also, un a loan modification, homeowners hoping to refinance won’t have to demonstrate that they’re experiencing financial hardship or at risk of foreclosure.

In fact, it’s quite the opposite: Unless you have a VA or FHA loan and you’re refinancing into the same loan type, you’ll have to qualify and demonstrate that you can repay the new loan. You’ll typically need to be current on your mortgage, too.

With refinance rates so low, it’s an ideal time to consider getting a new mortgage, and Credible can help you find great rates. You can compare prequalified rates from our partner lenders without affecting your credit score, all by filling out one simple form.

When a loan modification makes sense

Loan modifications are best if you’re:

  • Behind on monthly payments
  • Underwater on your mortgage

Loan servicers generally only approve loan modifications as an emergency measure for borrowers who are vulnerable to foreclosure.

A homeowner might find themselves in this situation if they’ve lost their job, had their hours cut back, been unable to work due to caretaking responsibilities, or experienced a serious illness or injury.

Another circumstance that can cause homeowners to struggle is having an adjustable-rate mortgage whose rate has increased, making the monthly payment unaffordable.


It makes sense to consider requesting a loan modification if you’re having financial problems and you don’t want to lose your home.

Here’s how a loan modification could help:

  • It could be faster than refinancing. One of the nation’s largest mortgage lenders, Wells Fargo, says it usually gives homeowners a loan modification decision in fewer than 30 days once you’ve supplied them with the necessary paperwork. Refinancing a home usually takes six to eight weeks.
  • You might end up with free home equity. While this outcome is highly unly, if your loan servicer reduces your loan principal, you will increase your home equity. However, debt forgiveness can be subject to income tax.


Modifying your mortgage may be your best option for avoiding delinquency or foreclosure, but it could still have negative consequences.

Here are some drawbacks to modifying your home loan:

  • It could lower your credit score. Your loan servicer might report the loan modification to the credit bureaus. Because a loan modification shows you’re experiencing financial challenges, it could lower your score. The effect, however, will be less serious than a foreclosure.
  • You can’t take any cash out. If your mortgage isn’t the only expense you’re struggling to pay, a loan modification may not solve all your problems — though the cash freed up from a modified monthly payment can help.

When a refinance makes sense

Refinancing is best if you:

  • Have some equity in your home
  • Are in generally good financial shape
  • Want to save money by getting a lower mortgage rate

Because refinancing requires you to get a new mortgage, you’ll have to pay closing costs.

Getting quotes through Credible can help you calculate a preliminary breakeven point and decide if you want to proceed. You can compare current rates from our partner lenders using the table below.

Want a short-term alternative to loan modifications and refinancing?

Loan modification and refinancing aren’t the only ways to find relief from your mortgage payments. If you’re experiencing challenging financial circumstances, you can look into mortgage forbearance as a short-term strategy for avoiding foreclosure.

Mortgage forbearance gives you a temporary break from making your mortgage payments or lets you pay a smaller amount for a few months. You’ll need to make up the payments later.

From March through June 2020, about 5.6% of homeowners took advantage of mortgage forbearance to help stay afloat.

Which method of changing your mortgage payment would help you most?

Potential solutionBest if…
Loan modificationYou’re enduring a major financial hardship and you need a long-term solution to help you stay in your home.
Mortgage refinanceYour income and credit are good enough to qualify for a new mortgage at a lower rate and you plan to stay in your home beyond the breakeven point.
Mortgage forbearanceYou’re experiencing short-term financial challenges, such as a pandemic-related loss of income.

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